Opening Range Breakout Strategy- 5 minute ORB Trading System (Day trading, Backtest)
Last Updated on February 7, 2023
Opening range breakout trading strategies are popular strategies, perhaps because of Tony Crabel’s classical trading book published in 1990: Day trading With Short Term Price Patterns And Opening Range Breakout. 31 years after it was published we still see an abundance of opening range breakout strategies on the internet. But do opening range breakouts work? We test some opening range ideas quantitatively:
Unfortunately, opening range breakout trading strategies don’t work very well anymore. In this article, we do some backtests on trading the opening range breakouts on the S&P 500.
What is an opening range breakout?
As the name indicates an opening range breakout happens when the price breaks away from what is defined as the opening range.
The open range can vary and there is no open range indicator. There is, of course, no definite answer to what is an opening range. You can define the opening range yourself, also depending on which time frame in trading you use. But obviously, in most cases, we are talking about a very short time frame. In this article, we test some day trading strategies and some strategies by using a bit longer time frame (daily bars).
An example of an opening range breakout
The opening range can for example be from the open of the daily session until the close of the first five-minute bar (obviously opening range breakout is intraday bars). Then you use the high and low within that 5-minute bar to determine where you should go long or short. It’s the max and low within that time frame that trigger the entries.
Let’s say you trade the S&P 500 futures contract. This means you record the high and low during the first five minutes, and you might go long if the price breaks above the high (thus the name breakout strategy). You can also add some filters as to the time frame of your trades, for example, take only trades between 0835 and 0900 local Chicago time.
You are not predicting the opening range – you are using it as part of your trading strategy after the fact.
When does the market set high and low?
If you are a day trader you might find it interesting to know at what time of day does S&P 500 set high and low. The linked article is old, but we can confirm that the main conclusions from this backtest are still intact: high and low for the day usually happen in the first and last hour.
If you trade opening range breakout, the information above is important. It gives you a real clue where to start.
Why trade the opening range breakout?
The opening session discounts news that has accrued overnight. Most times it is just noise and the opening is marginally different than the close the day before.
News needs to be adjusted to price and this frequently means volatility. A trader can only prey on volatility! That’s why it makes sense to trade around the open and the close. It is by no means easy, but at least it is better than the doldrums during lunch hours.
During the closing minutes of the trading session, any prior trends tend to be exacerbated – or reverse….. The marketplace is chaotic, and you need to use filters if you want to trade breakout trading strategies.
5 minute Opening range breakout (ORB) trading strategies – day trading
The internet is flooded with anecdotal setups on how to trade opening range breakouts. Anyone can set up such “systems” but the sad truth is that most of these ORB trading strategies don’t work. The only way to find out if an opening range breakout trading strategy works is by backtesting.
Let’s make some simple ORB trading strategies based on minute bars. Alle the tests below are performed on futures contracts within the regular trading hours Chicago time.
Opening range breakouts in the S&P 500 – Backtest and statistics
We buy when the price breaks above the highest price within time interval x and we sell at the close of the day (1500 local time):
The table can be understood like this:
- Column one shows the time of day (this is Chicago time – not NY time). 90 000 equals 09.00 and 120 000 is 12.00.
- Row one contains the result when the S&P 500 breaks above the highest price from 0830 to 0900. It can enter at any time after 0900 until close at 1500.
- Row two contains the result when the S&P 500 breaks above the highest price from 0830 to 1000. It can enter at any time after 1000 until close at 1500.
- and so on…
As you can see the average gain per trade is minuscule: the best is 0.04% per trade, something that will certainly not make you famous or rich. Also worth noting is the relatively low success rate (win rate).
Let’s flip the strategy and buy when the price breaks below the lowest price within time interval x (and sell at close):
Again, we sell at the close. But the result is even worse than buying a breakout to the upside.
We tested multiple other options around the opening, but we didn’t manage to find anything close to tradeable. You need to add some smart and logical filters.
We tested additional contracts for Nasdaq (NQ), gold (GC), silver (SI), and oil (CL) as well – with the same negative result.
Does it mean that this is either impossible to find tradeable strategies or we just find something that is curve fitted? No, you might need to add some daily filters:
Daily (weekly) opening range breakout
You can add filters by using daily bars (or even weekly bars). This is a different time frame than you might be doing the backtest on, but it often acts as a great filter. The daily filter can be based on longer trends, volume action, reversal patterns, oversold or oversold indications, etc. Only your imagination (or lack thereof) sets the limits!
Luckily, This way you can probably find tradeable strategies:
Opening range breakout strategy in Nasdaq (NQ futures) – daily and one-minute bars [- Backtest and statistics]
Below is an equity chart of a strategy we have been trading live for some time. In addition to the 1-minute bars we are using, we added one daily filter based on daily bars.
We buy a breakout after n minutes and we sell at the closing price of the daily session:
The number of trades is 198, the average gain is 0.27%, the win ratio is 65%, and the profit factor is 2. We believe this is pretty good. We don’t want to reveal the strategy because we might publish it as a strategy for our paying subscribers for the monthly edges.
Reasons not to trade opening range breakouts
The market has completely changed since Tony Crabel wrote his best-selling book. ORB strategies don’t work as well as they used to.
One of the reasons is the multiple false breakouts. The price might break out only to reverse and head in the opposite direction moments later. Another reason is that most of the gains have come during the night session. We have covered this in a separate article called overnight edges and strategies.
A second reason is the enormous computer power that scans zillion of possibilities. This means strategies are “arbed” away pretty soon.
A third reason is what we established at the beginning of the article: high and low for the whole trading day are more likely to happen in the morning and at the close. If you are trading ORB then you might arrive too late to the party.
The best strategies can be found in our….
Backtested trading strategies
That said, if you look at specific stocks you might get better results. Indices are just averages while tickers or stocks might have a life of their own, especially when they are in play. The beauty of the stock market is that there are endless opportunities to tweak and do research.
You might ask yourself: how do I find my open range breakout? The best way is to use strategy optimization. However, be careful not to curve fit and make sure you have something that might be robust.
Can the strategy be improved?
We are not oracles, and we are pretty sure there are traders out there who can improve the strategy. Do you have any ideas on how to improve it?
If so, please comment below or drop us an e-mail.
To sum up, we can safely say the opening range breakout strategies are much less relevant now than they used to be, at least for the most traded futures contracts or ETFs.
We recommend adding some daily filters but don’t risk overfitting your opening range breakout strategies!